Living Hand to Mouth – 7 tips for personal finance

Does it feel like the money in your account is not enough? At the store, I check the bank account on my phone to figure out that “I can afford this”. Afterward, I remember a couple of other things, that still need to get paid. Great. now I’m stuck eating noodles. Only 14 days until payday!

Well, lucky there is the credit card, I can swipe it this time and kick the can down the road. Rent and debt payments ofcource are paid at the payday and last week of the month I have to penny-pinch on the food.

This is how I used to live for a long time. I can tell you this was a great, unneccessary source of stress and anxiety.

Self-indulgence and the impatience to save for things

My patience is not enough to save up money to buy things. I want to improve the quality of my life now rather than even more but later.

I used Excel to make estimates of my spending and how much cash would I have left over for clothes, expensive black plastic and fun.

Problem with this is that even when I decide where I want to spend my money, its hard to stay on track and I ended up slipping up from the otherwise solid plan.

When I find something from the store, I don’t think “how much I have spent already” or “what do I still have to pay”. It just easier to check the account balance on my phone, which looks like I’m going to take these shoes.

Regardless of how good pasta is, this kind of living eats away the quality of life, general happiness, and even social life when one must tell their friends why they won’t be going out with them this weekend.

I wanted out from the situation described above.

I wanted, that I always have the amount needed on my account.

Just switch to a higher paying job, right? Unfortunately it ain’t that simple. When your income grows, usually the expenses also scale up. It’s not the amount of money, its how its being used.

I found a way out of my old hand-to-mouth existence, here are my 7 tips from personal finance that has worked for me!

Personal finance management

It’s good to notice that I am not a financial adviser. You know your finances the best and if you need help, seek a professional.

1) List your income, do not spend money that you dont have.

Make a financial estimate, aka. a budget, that has your best estimates of your income and expenses. Take into account only the money available for you right now, do not budget the money you receive later.

Be honest to yourself and give every penny on your account a job, what it counts towards.

2) Decide in advance, where you spend your money.

You only have a set amount of money that has to last until next payday. Decide in advance how much of that is going towards different categories like food, what bills you have to pay. Plan and list your expenses as good as you can.

When every penny has a job, its easier to stay on track to your goals. When you want or need to do an impulse purchase, use your budget to decide where that money is away from and whether you can give it up. If you cant, you simply can not afford the purchase.

3) If money is left over, use those for next month’s expenses.

You will have expenses next month too, good examples would be living and food.

Decide, what you want the excess money to count towards. When the pay finally hits your account next month, those expenses are already partially covered and you will have more left over.

Over time, this will make a small buffer on your account. Old money leaves and new money comes in. Single dollar stays in your account for longer and you automatically avoid overdraft fees!

If you have interest-bearing credit or loans, you should to use “extra” money primarily to paying them off. This will lighten the financial burden in the near future and even more of your money will stick around!

4) Track every penny leaving your account.

Do you know how much money you spend every year on clothes? How about food? Or bars? Would you even want to know? Maybe, why not? Are you afraid its a lot? Exactly.

When you systematically track where your money is going, your budget stays up-to-date. You can also analyze spending trends and average spends and use that info for future budgeting.

No more guessing, how much you should reserve for different spending categories, you can use data to figure it out!

Suddenly you have enough money for food and you can forget about the pasta and the questionable meatballs. When you have enough money budgeted for stuff, it feels awesome when you can spend what you need and not having to worry about it.

$5 takeaway coffee, five days a week makes $100 per month, which could buy you 350 lbs of pasta (160 kg)

Look into the past only to learn from it, don’t blame yourself or worry about the past mistakes – you can’t change the past anyway.

The idea of the tracking is to keep your budget up to date so you can trust it. You will also start noticing small routine expenditures here and there that really add up over time! When you have full data of your spending, you can use it to make data-driven decisions!

5) Don’t be ashamed of your real spending.

Embrace your true spending habits. It’s fine to put money towards things that make you happier and improve your quality of life, but you need to budget and reserve enough money for these.

There is no guilt, don’t be hide information from yourself because you are afraid to find out how you actually use your income. When you take into account your actual, true expenses, it is easier to prioritize and decide where to save so you can spend elsewhere.

6) Optimize your credits and expenses.

When you track your expenses, you will shortly find out opportunities to optimize. Most of us have small but meaningful expenses that add up over time, for example:

Lunches at work and school

Restaurants and bars

Car related expenses

Financing and interest payments

On some situations, its event worth it to take new, cheaper loan to pay off your old loans with higher interest rates and fees.

7) If you want to buy something with an installment, use a credit card.

Annual interest rates of credit cards (with a few scammy exeptions) are usually within 6-12 %. Installment plans that stores tend to offer other types of consumer credit have way higher annual rates, within 10-46 %.

A credit card is like a screwdriver. Its a handy tool for it’s intended purpose but use it wrong and it can land you in a lot of hot water.

Financial institutions and card-issuers are not doing charity, they do risk management and profit. It is worth your time and money to investigate and choose wisely your credits when you want to buy something on installment.

Example:You buy a $ 1200 TV with a 12-month installment:

Consumer credit

Annual rate:34,64 %Total interest:$236,88Total:$1436,88

Credit Card

Annual rate:8,92 %Total interest:$58,77Total:$1258,77

Difference

Annual rate:25,72 %Total interest:$175,11

In the example, I have used real rates from few credit institutions operating in Finland. Common rates for credit cards like Visa are not that far off worldwide.

With a consumer credit you would have to fork over $15 per month extra, added to your normal $105 monthly payment.

In the example, your installment television is almost $200 cheaper, because you chose your credit wisely.

You can easily compare the credits available for you with this calculator for example and see how much would be the total interest for your purchase.

Budgeting, saving and paying by cash would be still the cheapest option here, but come on, we only human.

Pro tip for people in the market for cars: Dealerships sometimes offer “zero interest and fees” installments for their cars. As your bank for a car loan offer and ask the dealership how much cheaper they can sell the car you pay cash on the spot. Usually the fees are added to the price of the car.

My solution for financial discipline: a personal budget

You Need A Budget (YNAB)

I switched over from goofing around in Excel to this cloud-based application called YNAB (You Need A Budget) that I’ve been using for about one and a half years for now.

Service costs around $5 per month, but I’ve noticed that I save way more than that on money, nerves and the peace of mind.

How it works

As you can see in the example above, I have 168,75 € left for food this month. With a quick calculation that makes about 12 € per day which I can easily stick to.

You enter info to the app:

Amount of money available

Income as you get them

How much you want to reserve money for each category

Bills and purchases: How much and where

YNAB keeps track of your income and expenses. You can check how much money you have available for each category and get reports on your spending habits. You can use these to determine how much you should budget next month.

In practice, when I go shopping for grub, I add the total amount of the receipt with the name of the store to the app, which then figures the category from what I’ve used before, click save and I’m done.

I take a better look at my budget every couple of weeks and on the payday, I add the expenses I’ve forgotten to log on the go from my bank statement and when the amounts on the account and YNAB match, I know everything has been logged.

I don’t check my account balance to determine if I can afford something, I check my budget.

I can always check by category how much I have left on the food budget, how much I can burn to hobbies and whether I should leave that car wash for next week when I get paid.

The advantage of budgeting is that you can always change it on the fly.

If you really need to buy those shoes right now (as they are your size, you have been eyeballing them for long and they are -70 % off), you can add those to your budget. You just need to make the informed decision where that money is away from and can you afford to do those cutbacks.

If you find something you need on really good sale, its usually good idea to take the opportunity if you can!

Other reason why I like this app instead of spreadsheets is that it makes it easy to manage multiple credit cards.

For example, if I buy food with a credit card (for points!), is the money moved from food-category automatically towards paying down the credit card. When the bill arrives, I already have 100% of the money to cover it! YNAB can also handle other loans and multiple accounts well.

For some countries, like, US there is also available a wide variety of banking integrations. That allows you to import your transactions automatically. Shame this function does not cover any Finnish banks and I haven’t been able to import the transactions from my Finnish flavor of American Express card to the app automatically.

Conclusion

I still live off credit cards, because I can, not because I have to. Credit cards have their own privileges like cash-backs and flight miles that you cant get by paying with debit or cash.

When a bill arrives, I always have the amount needed to cover it and I don’t have to wait until payday.

Strict budgeting has made meaningful improvements to my quality of life

More of my money goes towards what I decide instead of what I wanted at that point in time.

I can still make impulse purchases, but I have to decide what I have to give up to get that.

Because I have about one months expenditure’s worth of buffer on my account, I haven’t seen any overdraft fees since I started budgeting.

It is not for granted that one is good with money. For me, it required studying, optimization of my spending and a lot of small tweaks to my daily lifestyle.